Macau tycoon wants his bank back (7/6/07)

HONG KONG — It's been nearly two years since Stanley Au, a colorful gold trader with a long history of links to North Korea, lost control of his Macau bank in a swirl of U.S. government charges that it had laundered cash and bogus U.S. $100 notes for dictator Kim Jong Il's regime.

Au now wants control of his bank back, even if it means confronting the U.S. Treasury Department, which asserts that he may still be in league with North Korea.

He has the implicit backing of the Chinese government.

Speaking from Macau, the gambling haven about an hour's ferry ride from here, Au said he wouldn't succumb to American pressure to sell his interest in Banco Delta Asia.

"A definite 'no!' " Au said, in his first public remarks on the matter. "This is my family crown jewel. I committed no illicit activities. Why should I give up something that is built up by two generations of my family?"

More is at stake in the deadlock over the future of Banco Delta Asia than whether Stanley Au once again sits in the director's chair at a bank that his father started 72 years ago.

Au's challenge raises the question of whether the Bush administration operated arbitrarily as it turned an obscure banking provision into a potent financial weapon that it one day may desire to use elsewhere around the globe, perhaps against Iran.

For China, the issue is U.S. interference in a Chinese enclave whose banks are under Chinese regulation.

A former U.S. diplomat with vast experience on North Korea is siding with Au and his lawyers in affirming that the Bush administration may have drummed up a case against Banco Delta Asia, relying on old evidence, in an effort to put the financial screws on North Korea.

"The evidence against BDA is feeble at best, and much of it dates from prior to 2001. That's a view shared by friends across the bureaucratic spectrum in Washington. The main motive was political," said C. Kenneth Quinones, who was a desk officer on North Korea at the State Department in the early 1990s and until last year an informal conduit between the department and North Korean envoys at the United Nations.

Even though its facts are weak, Treasury Department officials don't want to relax sanctions on Banco Delta Asia, out of concern that backtracking may open legal challenges to a measure that's surprised U.S. officials with its effectiveness, Quinones said in an interview in Tokyo.

"They can't back off. They committed to what they considered a legally justified process. They painted themselves into a corner," said Quinones, who has a Ph.D. in East Asian languages and history from Harvard.

When the Bush administration declared on Sept. 15, 2005, that Banco Delta Asia was a "primary money-laundering concern" because of its business with North Korea, customers staged a run on the bank, draining it of 34 percent of its deposits in three days. Fearing runaway loss of faith in the banking system, the government of Macau, a former Portuguese colony, sent a three-person commission to run the bank's day-to-day affairs. Au willingly ceded control.

The seizure infuriated North Korea, which maintained some $25 million in deposits at the bank, and effectively cut it off from the global financial system, a crippling blow for an impoverished, isolated land. North Korea walked out of six-nation talks intended to halt its drive to build nuclear weapons, and staged a nuclear test last October.

Late last month, after a delay of four months, the Bush administration facilitated the movement of the deposits to a Russian bank where North Korea would have control. The nuclear talks appear to be back on track, and North Korea says it's willing to negotiate a date to shut down and seal its Yongbyon nuclear facility.

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Banco Delta Asia, though, remains under sanction from an obscure but powerful article of the 2001 USA Patriot Act, Section 311. The measure allows the Treasury to bar the bank from the U.S. system — and essentially the global system — once it's deemed linked to terrorism, money laundering or the passing of counterfeit currency. Congress isn't required to oversee such sanctions, and Treasury's evidence doesn't need to be made public.

The Treasury Department has told Macau that it doesn't want Banco Delta Asia falling back into Au's control because of his "potential for recidivism."

"We continue to have serious concerns regarding the bank's potential to be used, wittingly or unwittingly, for illicit purposes," a March 19 Treasury ruling says.

In legal filings and statements, Au and his lawyers assert that Banco Delta Asia, a relatively small bank with eight branches and 150 employees, has been unfairly singled out for its dealings with North Korea. Au said in a sworn statement May 2 that he knew of about "two dozen foreign banks" that had North Korea-related business up until September 2005, and "that two other banks in Macau did substantially more business with North Korean entities than Banco Delta Asia."

Au wouldn't provide further details in a conversation with a reporter.

In addition to those other banks, some major foreign companies have had dealings with North Korea — including a German bullion trader, the Heraeus Group — but haven't been punished. According to an internal audit of Banco Delta Asia conducted in 2005 by the accounting firm Ernst & Young, Au and his bank have bought some 8 tons of gold this decade from North Korea. Much of that gold later was passed on to Heraeus, it said.

Au's long-standing ties to North Korea are no secret. He acknowledged in his statement that he's been to the Hermit Kingdom some 10 times in the past 25 years, primarily at the invitation of his clients.

The Treasury ruling against Banco Delta Asia accuses it of providing financial services "for more than 20 years to multiple North Korean-related individuals and entities," including one "known international drug trafficker." Treasury has declined to name the drug trafficker or provide details of how the bank allegedly helped North Korea enter counterfeit U.S. $100 bills into circulation.

In his own statement, Au said that the only time a North Korean client had deposited counterfeit currency at his bank was in 1994, and he subsequently cooperated with U.S. officials in an inquiry.

In his campaign to win back control of the bank, Au has pledged to cease doing business with North Korea and not to hire back any of his former senior managers.

China, which took back control of Macau from Portugal in 1999, has quietly come to Au's defense, resisting U.S. pressure to force him to sell the bank, saying the pressure amounts to interference. Quinones said senior Chinese officials had told him that "if the U.S. Treasury Department begins to intrude into private banking and business, then foreign investors will pack up and leave."

That posture has put Beijing at loggerheads with Treasury Secretary Henry Paulson, who hails the use of financial sanctions to rein in "rogue" nations and terrorists, and encourages other nations to give their finance ministries similar tools.

"Because we are learning to apply our tools in this way, our financial actions have produced demonstrable impacts on threats ranging from terrorist groups to narcotics cartels, and on dangerous regimes in North Korea and Iran," Paulson said in a speech June 14 to the Council on Foreign Relations in New York.

He said the financial tools "may not deal a knockout punch, but they can and will produce results and change behavior."

The battle between Au and the Treasury Department has yet to enter the judicial arena to test the legal footing of Treasury's use of Patriot Act Section 311. Au and his lawyers have petitioned the Treasury Department to lift the sanction, and the department says a review is pending.

"Nobody's really fought this Treasury ruling, and Stanley Au seems ready to fight it tooth and nail," said John McGlynn, a Tokyo-based researcher who's written about the Macau banking case in Japan Focus, a scholarly journal.

Banco Delta Asia is trying to get back on its financial feet. (Tim Johnson, MCT) Tim Johnson, MCT